Sri Lanka: Real estate market

Real estate: Once again, is buoyancy back?

The Research Intelligence Unit – www.riunit.com

The RIU has been conducting market surveillance in the real estate sector for the past four years and all evidence indicates that the levels of interest in the Sri Lankan real-estate market remained strong throughout the past few years, with both the local and international stakeholders keeping the faith despite all the setbacks. Whilst deal closures were stifled in recent times, our forecast that buoyancy will return in 2009 looks a good bet now that the dawn of peace is enthusing new investors

Boom in the offing

Essentially, the real estate sector is a time-lagged market so we do not expect to see any immediate impact of a peace dividend. However, sources on the ground have noted an improvement in investor sentiments. The past two months have seen a slight improvement in deal closures according to Shan Kumarage of Bhoomi who notes that buying and selling patterns have picked up. However, he thinks that it will be in 2010 that the market will start to boom so long as conducive government policies for economic development get into gear. Given that many people are waiting on the sidelines, ready to invest in Sri Lankan properties, appropriate polices hold the key to this market. He claims that the leisure sector in particular will be very sensitive to policies in the tourism sector as well as the property market.

However, according to real estate related web traffic and feedback there is no notable improvement in the luxury condominium market as yet. This segment recoiled to a significant extend over the past two to three years after experiencing a mini boom at the turn of the new millennium. This is evidenced by the ostensible number of partially completed condominium projects in and around Colombo city. However, there is some evidence that work is re-starting in some projects and we have noted at least one new condominium project start construction work in Kandy. However, Shan notes that “condominium developers will have to work really hard to market their apartments during this year and next year till the economy of the country becomes somewhat stable.”


Source: Bhommi (www.bhoomi.lk)

Sum of parts

The real estate market in Sri Lanka can be distinguished into several categories. The high value segment of this market consists of the luxury apartment and condominium sector. Whilst this segment was amongst the first to take-off during the 2003-06 period it was also at the frontline when the market started to ‘feel the pinch’ in 2006 when prices and pre-construction sales witnessed a downturn. The South Asian region overall is looking at a continued incline in the high-value property market for years to come with the Indian Middle-class population now estimated at over 40 million. One indication of the buoyancy in this sector can be seen with reference to the large number of Indian corporations that are backing large-scale real-estate projects here in Sri Lanka.

Another important category of the market is the middle-income segment that is also increasingly dominated by property developers who sell ready-built houses and plots of land. This segment is dependent on interest rates and the domestic economy and several other key factors including demographic trends. Cultural and societal trends that are leading to wider home ownership in Sri Lanka, especially amongst young newly married couples who area increasingly looking to own their own home as compared with the option of living with their parents is also driving the market.

Consequently, demand for home loans in Sri Lanka is on the rise. Industry experts says the market has grown at a compound rate with the escalation of per capita income and changing patterns of consumption and saving habits in the recent past.

The key factors triggering the progressive growth of home loans on the demand side are:
•Changes in interest rates
•Tax benefits extended to borrowers
•Demand arising from migrant workers and Sri Lankan’s residing abroad.

Another force in the land and property market is the leisure property segment that is mainly driven by foreign interest. This market is directly connected to the tourism trade which is now set to fulfill its true potential after a long period of under-achievement. However, tourist arrival figure to date do not show any marked improved as yet due to the overall impact of global recession.
We can also note that the interest in commercial property and office space is a significant contributor to the overall industry. This market is driven by additional factors that include local infrastructure, availability of parking space, population density and security. With an improvement in the latter, we can expect plush commercial property at the heart of the city to once again be in high demand.
Outlook and forecast
Demand for housing in Sri Lanka is estimated at a rate of 80,000 to 100,000 units per annum and this number is expected to substantially increase in the future. State owned institutions play a major role in the housing finance market in Sri Lanka. Traditionally, the housing finance market has concentrated on state funded sources since housing development strategies in Sri Lanka have been mainly initiated through state owned institutions. The Government concentrates mainly on affordable housing for low and middle-income earning groups with a policy that includes subsidized housing loans, participatory housing schemes for low-income groups and apartment complexes in urban areas for middle-income groups.
In urban areas, shanties are cleared and the land is released for development of apartments for shanty dwellers. The income derived from the acquired and released land would be sufficient to construct apartments for shanty dwellers who abstain from the right of living on the land acquired.

The growing demand for condominium properties, particularly in the Western Province has raised questions with regard to the policy environment and institutional frameworks that are needed to regulate the sector. Some recent amendments to the legal framework include the Apartment Ownership Law No 11 of 1973 which has been amended by Act No 45 of 1982 and further amended by Act No 39 of 2003 giving more and more authority and flexibility to apartment owners and lenders.

Legislation in 1973 introduced a statute called the Apartment Ownership Law, replacing the Condominium Property Law. Today, the law on Condominiums in Sri Lanka is governed by the Apartment Ownership Law and its amendments made in 1982. Roman Dutch Law was limited in the sense that it recognized singular ownership from the ground level upwards and did not make provision to recognize ownership in the horizontal layers of a building. However, shortcomings remain. For instance, it is difficult for banks to lend on these apartments sans ownership deeds. Some banks have developed tripartite arrangements that involve the lender, buyer and developer
for cases where the property is still under construction. However, these are limited to selective clients. Due to the rising demand for condominiums, the government has instituted a Condominium Management Authority.

The real estate sector is essentially a time-lagged market where current deals closures are only recorded several months in to the future. Whilst there are no signals in our data to make a song and dance about, clearly the current climate offers a opportune time for investors to start developing their real estate portfolio. According to Shan, Sri Lanka being an “ideal business location in Asia and the Indian Ocean, has a very unique and profitable real estate market and with the conflict being concluded, the hope for a stable economy is in the air and with the first few hints of a stable economy, the market will boom and the prices will take-off. Therefore, I recommend the current situation as a golden opportunity for potential investors to start.”